Software Developer Accused Of Aiding And Abetting Illegal Gambling

On January 8, 2013, the Supreme Court of the State of New York conducted a hearing in a criminal case that may cause concern among software developers whose software could be used for illegal activities.

In February 2011, Robert Stuart and his wife were confronted by authorities at their Arizona home with potential charges ranging from money laundering and operating an illegal enterprise to engaging in the promotion of gambling. The potential charges stemmed from Mr. Stuart's software, called Action Sportsbook International (ASI), which provides infrastructure for online casinos and sportsbooks to run betting operations.

While opinions regarding whether certain forms of gambling are illegal appear to be changing, it is still illegal in New York to operate an online sportsbook or horse racing betting business. It is also illegal in New York to aid and abet someone in the operation of such an illegal gambling business.

Initially Mr. Stuart signed a plea agreement that would have required him to install a "back door" into ASI to collect information on online gamblers; however, Mr. Stuart later rescinded the agreement. Consequently, in October 2012, Mr. Stuart, his wife, his brother-in-law and his company were formally charged under New York Penal Law § 225.10, which states that "[a] person is guilty of promoting gambling in the first degree when he knowingly advances or profits from unlawful gambling activity by . . . [e]ngaging in bookmaking to the extent that he receives or accepts in any one day more than five bets totaling more than five thousand dollars."

According to the New York County district attorney, the defendants each "knowingly advanced and profited from unlawful gambling activity by engaging in bookmaking to the extent that [the defendants] received and accepted in any one day more than five bets totaling more than five thousand dollars." The New York County District Attorney’s Office has not publicly alleged that Mr. Stuart accepted any bets, but it has alleged that others used ASI to make or receive illegal bets. The district attorney's office also alleges that the quarterly licensing fees paid to Mr. Stuart's company by businesses that were licensing ASI directly resulted from illegal gambling operations by third parties in the United States. It appears that the district attorney's reasoning is that by distributing software that facilitates betting or wagering infrastructure and by taking licensing fees, Mr. Stuart (indirectly at least) accepted illegal bets and profited from illegal gambling. The district attorney may also argue that by accepting payment, the source of which may have derived from illegal bets, Mr. Stuart accepted illegal bets. Although each line of reasoning may come as a surprise to some, the end result is that Mr. Stuart is being held accountable for others' illegal activities using a product that he developed and licensed for lawful purposes.

Mr. Stuart, in discussing the charges, has stated that he simply licensed ASI to his customers, all of whom he says are abroad and operate in jurisdictions where online gambling is legal. Because online gambling is legal in the jurisdictions where his clients reside, he says he had no knowledge of any illegal operations. However, his claims of ignorance may not be enough: Under New York Penal Law § 15.05(2), a "person acts knowingly with respect to conduct . . . described by a statute defining an offense when he is aware that his conduct is of such nature or that such circumstance exists." In Mr. Stuart's case, this may mean that he may have been aware that ASI may have been used for illegal gambling. Software companies should note that, under federal law and possibly the law in other jurisdictions, a person's "knowledge" includes his or her intentional ignorance of facts that indicate unlawful activity. This means that if a company actively ensures that it remains unaware of illegal use of its software, it could still be prosecuted for knowingly engaging in illegal activity.

Here, Mr. Stuart's company received licensing fees for ASI in three ways: (1) by wire transfer; (2) by cash deposits made directly into his company's bank account; and (3) by money orders deposited directly into his company's bank account. Because cash and money orders are unusual methods of payment for software licenses, Mr. Stuart, it can be argued, should have been aware that the payments could have been made up of proceeds from illegal gambling. Consequently, Mr. Stuart may have "knowingly" been accepting illegal bets from the licensees of ASI in the form of licensing fees. Similarly, the license to ASI permitted licensees to sublicense the software to others without Mr. Stuart's knowledge or consent. Because the license permitted sublicensing without Mr. Stuart's consent, and indeed Mr. Stuart knew that ASI was often sublicensed to casinos or sportsbooks, he may have been aware that ASI may have been used to take illegal bets. That ASI was freely sublicensable, coupled with the fact that the popularity of illegal online gambling in the United States is well known, bolsters the likelihood that he was aware that a licensee in a jurisdiction where online gambling was legal could have freely sublicensed ASI to illegal gambling operations in the United States.

This action against Mr. Stuart and the other defendants is still in its early stages, and the strength of the district attorney's case remains to be seen. Software companies, however, should pay attention to how this case proceeds. Prosecution of a software developer for crimes committed by its users sets a dangerous precedent and starts the country down a slippery slope of prosecuting people for others' acts.

The key practice tips for software developers who license software for operations that are legal in some jurisdictions but not others are as follows:

Clearly and explicitly prohibit use of your software for illegal purposes or in jurisdictions where its use may be illegal, and reserve the right to terminate the license upon suspicion of potentially unlawfully use.

Know to whom you are licensing your software and how your customer is using the software. If you have concerns about how a potential customer might use your software, don't license it to the potential customer. If you have already licensed the software to a customer and you have concerns or learn that the customer is making unauthorized use of the software, consider terminating the license.

In the licensing agreement, require your customer to obtain your approval to sublicense your software or otherwise restrict the customer's right to sublicense its rights.

Pay attention to irregularities or other clues that your customers may be using the software for illegal or unauthorized purposes.

License fees paid in cash or substantial use of license keys by sublicensees may be such clues.

Keep yourself informed of how your software is being used and investigate rumors of improper use.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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